Lower investment management costs are no longer a reason for pension funds to consider a merger, according to two scholars affiliated to pension regulator De Nederlandsche Bank (DNB).
“Today, scale hardly produces cost efficiencies for pension funds,” according to Jaap Bikker, a retired professor at Utrecht University and a guest researcher at DNB, and Jeroen Meringa, a company analyst with the regulator.
The pair said that dozens of pension funds in the Netherlands have merged or been liquidated in recent years. “The most important reason for these mergers have been lower costs per invested euro due to economies of scale.”
According to DNB, there were more than 500 independent pension funds in 2010. By 2021, this number has more than halved to just over 200.
The economies of scale that have often been used to justify mergers were indeed substantial until around 2004, Bikker and Meringa noted. However, these benefits have rapidly decreased in recent years because most of the smallest pension funds that had the highest cost levels have disappeared over time.
The pair found that scale still produces some cost advantages over the period between 2012 and 2019 for investments in equities and fixed income. But, they said, these are so minimal, at 5%, that they are not statistically significant.
Bikker and Meringa calculated that, if all smaller pension funds were to merge to obtain a similar size as the fifth-largest pension fund, investment management costs would drop by 2.4%, or €64m.
“This is 0.8% of total investment management costs. As such, potential cost savings of this magnitude do not carry enough weight to serve as a reason for pension fund consolidation,” they argued. “With this, an important reason for further consolidation and upscaling has disappeared.”
The pair did not exclude, however, that there may be efficiencies of scale for separate investment categories such as private equity or infrastructure. Most smaller pension funds have no or negligible allocations to these asset classes.
They also said that pension fund consolidation still produces economies of scale for administrative costs, though these cost reductions have also decreased from 36% in 1992-2004 to 10% in 2002-2013, according to earlier research.